Triad Keeps Bad Debt at Bay -- for Now

Triad ( TRI) looks like a company on the mend.

The Texas-based hospital chain posted healthy first-quarter results that beat Wall Street expectations and -- perhaps more importantly -- exposed no troubling surge in bad debt expense. The company blew past both revenue and profit estimates and saw its bad debt ratio stabilize just above the 10% mark in the latest period.

In contrast, the nation's two largest hospital chains -- HCA ( HCA) and Tenet ( THC) -- have predicted that bad debts, triggered by a spike in uninsured patients, will gobble up roughly 12% of their revenue this year. Thus, Wall Street took some comfort in Triad's latest report.

"Triad's bad debt expense was in line with expectations, which was an encouraging sign," wrote Prudential Equity analyst David Shove, who has a neutral rating on Triad's stock. "Triad could be nearing stability in this troublesome operating expense."

Triad's stock jumped 7.1% to $33.99 on news of the solid quarter.

Saving the Day

Triad posted particularly strong top-line growth, with revenue jumping 23% to $1.13 billion and easily beating analyst expectations.

A surge in patient admissions drove the revenue hike. On a same-facility basis, the company grew inpatient admissions by 5.9% and inpatient surgeries by an even stronger 6.9%. It also enjoyed a sharp 12% rise in patient revenue.

CIBC World Markets analyst Charles Lynch was clearly impressed.

"Top-line growth carried the day," declared Lynch, who has a sector perform rating on Triad's shares. "Same-store revenue growth was likely the strongest first-quarter showing in the hospital group."

Triad toppled bottom-line expectations as well. The company posted first-quarter operating profits of 66 cents a share that were a full 7 cents ahead of the consensus estimate.

Bad debt expenses, which came in lower than expectations, helped out. But Shove saw other reasons for the upside surprise as well. He pointed to nonoperating metrics, such as increased minority income and lower tax rates, as big contributors. Excluding those factors, he said, Triad would have actually reported profits that were in line with expectations.

Shove also pointed out that Triad simply maintained -- rather than raised -- its full-year guidance despite the big first-quarter surprise.

"By affirming 2004 earnings guidance, Triad is saying that the rest of 2004 EPS earnings will be below current expectations," Shove determined. "We view this as an indication that Triad's underlying earnings power remains threatened by industry forces -- especially bad debt."

Even Triad itself issued words of caution about its bad debt provision.

"The company believes the provision will continue to be subject to change throughout 2004 based on evolving business conditions and the effectiveness of company actions in response," Triad stated. "And this could significantly impact 2004 EPS."

Supply Siders

In the meantime, other expenses have already cut into Triad's operating margins. Supply costs, in particular, have started to surge.

On Tuesday, fellow hospital operator Health Management Associates ( HMA) also reported a jump in supply expenses. But HMA could be struggling with company-specific issues as well. For months, Kenneth Weakley -- the UBS analyst credited with exposing Tenet's aggressive pricing strategy -- has warned that HMA could face pricing problems of its own. He believes that HMA's prices are higher than most and, therefore, vulnerable due to increased scrutiny of the hospital industry.

In the meantime, Weakley pointed to some weak spots in HMA's latest results. For example, he noted, HMA seems to be treating a fair number of nonpaying patients despite its industry-low 7.1% bad debt ratio.

"For the fiscal year 2003, charity write-offs were ... up more than 61%," wrote Weakley, who recommends selling HMA shares. "These statistics show that HMA is indeed witnessing the same degree of self-pay issues that others are witnessing, although due to how the company reports revenue and thus bad debt, the optics on a reporting basis are not as alarming."

Weakley pointed to other soft spots as well. He described HMA's same-store surgery and operating cash flow, at least on a 12-month rolling basis, as "quite weak." He also pointed out that the company's pretax profit margins, hit by rising expenses, actually shrank in the latest quarter.

Weakley did acknowledge the same strong metrics -- such as rising admissions and steady bad debt -- that cheered the market on Tuesday. But he nevertheless continues to warn investors away from the stock.

"Our Reduce 2 rating on the stock remains firm, despite the solid quarter," he stated. "Our concerns on higher than average gross charges, weak cash flows over time and declining returns on investment lead us to conclude that, at current valuations, the stock is quite expensive."

Weakley values HMA's stock at $18. Following a 4.3% surge on Wednesday, the shares were at $23.

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